Saudi Arabia: Oil And Gas In The Kingdom Of Saudi Arabia — An Overview

Sector Profile

The Basic Law of Saudi Arabia (Royal Decree No. A/90 dated
27/8/1412 H (1 March 1992)) vests all of the Kingdom of Saudi
Arabia's oil and gas wealth in the Government. The Ministry of
Energy, Industry and Mineral Resources
("MEIM") (previously the Ministry of
Petroleum and Mineral Resources) develops and implements policies
relating to oil and gas and represents the Kingdom's oil
production and pricing policies internationally. In May 2016, the
Kingdom announced reorganisations of the oil and gas sector,
including the replacement of oil minister Ali Al-Naimi, who had
served in that position since 1995, with Khaled Al-Falih, chairman
of Saudi Arabian Oil Company ("Saudi
Aramco"), the Kingdom's national oil company.

The oil and gas sector is, by a significant margin, the most
important contributor to the Kingdom's economy, which
traditionally runs a significant annual current account surplus, as
well as a major source of the country's global financial and
political influence. The Kingdom has some 265 billion barrels of
proven and recoverable oil, accounting for up to a quarter of
global oil reserves, and up to 258 trillion cubic feet of natural
gas, the fourthlargest reserves in the world.

Oil Price Crash

In 2014, the world saw a stunning fall in oil prices from a peak
of US$115 per barrel (Brent) in June 2014 to under US$35 at the end
of February 2016. OPEC's Annual Statistical Bulletin reported
that petroleum export revenues for OPEC Countries fell in 2015 to
US$518.2 billion, a drop of nearly 46% compared with 2014 and the
lowest level since 2005. Total OPEC crude-oil exports, meanwhile,
stood at 23.6 million barrels a day in 2015, up 1.7% from 2014,
with nearly 62% of OPEC's oil exported to the Asia Pacific
region. World oil demand rose by 1.7% to 93 million barrels a day,
with the largest increases taking place in Asia Pacific countries
such as India and China.

During the OPEC Conference in Vienna in June 2015, proposals
were made to curb oil production in reaction to the tumbling price
by reducing the aggregate 30 mb/d ceiling. The Kingdom played a key
role in OPEC's ultimate decision to block any such production
cuts by arguing that OPEC must seek to protect its market share
from US shale oil producers. The Kingdom's then-current oil
minister, Ali Al-Naimi, was emphatic in his support of maintaining
high production levels, stating, "demand is going to increase
anyway ... nothing has been curtailed. We have a responsibility to
maintain our 12.5 million-barrels-a-day capacity." The
Conference noted that the global economic recovery had stabilised,
albeit with growth at moderate levels, and that the sharp decline
in oil prices witnessed at the end of 2014 and the start of
2015—caused by oversupply and speculation—had abated,
with prices moving slightly higher in the months leading up to the
Conference. The Conference noted that world oil demand is
forecasted to increase in the second half of 2015 and in 2016, with
growth driven by non-OECD countries.

The Kingdom maintained its stance on production with crude oil
exports from the Kingdom during the first half of 2016, with supply
3.5% higher than during the same period in 2015. The Kingdom
exported 61% of its crude oil to Asia in 2015. This figure has
risen to 65% in 2016. The International Monetary Fund expects that
the Kingdom's oil production will average 10.34 MMbpd in 2017,
as compared to 10.22 MMbpd in 2016.

However, the expectation of a further rise in crude oil
production from the Kingdom will likely have a negative impact on
already struggling crude oil prices. As at the time of writing, the
Brent crude price is moving within a tight range surrounding
US$50.

Impact of Saudi Vision 2030

It is against the backdrop of reduced oil prices and the
correspondingly reduced oil revenues, upon which the Kingdom has
been historically so dependent, that the Kingdom's "Saudi
Vision 2030", which seeks to diversify the economy away from
reliance on hydrocarbons, is driving significant structural changes
to the governance of the oil and gas sector. Saudi Vision 2030 aims
to address the impact that these reduced oil revenues are having on
the Kingdom's economy by:

seeking new sources of revenues to
replace the lost oil revenues, which is why the Government is
aiming to see the Kingdom's non-oil revenue increase from
SAR163 billion to SAR1 trillion by 2030; and

reducing Government expenditure,
through down-sizing the Government and the public sector,
privatising government enterprises and promoting private sector
investment (both domestic and foreign) in areas like social
infrastructure.

The Government also plans to list up to 5% of Saudi Aramco's
shares with foreign investors invited to participate in the
listing. The proceeds of the Saudi Aramco listing will go to Public
Investment Fund, a sovereign wealth fund that will also hold the
government's remaining portion of Saudi Aramco's
shares.

Refineries and Petrochemicals Projects

The Kingdom's refining and petrochemical sector has
registered a strong double digit growth year-on-year since 2007.
Ten percent of global petrochemical export products have been
manufactured in Jubail and Yanbu on the Kingdom's east coast.
These dedicated industrial cities are the centre of the
Kingdom's petrochemical industry and play a key part in the
Kingdom's determination to develop its hydrocarbon-based
industries further down the value chain. Despite the global
economic downturn, we understand that the Kingdom plans to expand
its petrochemical industry three-fold over the next 10 years to
build new plants, expand existing ones and integrate refineries
with new or existing petrochemical units. Saudi Aramco (which is
described further below) or SABIC (to a lesser extent) are always
participants in new refineries or petrochemicals projects in the
Kingdom.

Saudi Aramco

While functionally independent from MEIM, Saudi Aramco is
directly overseen by the highest levels of Government and its board
comprises the Ministers of Energy, Industry & Mineral
Resources, Finance and Communications together with the secretary
of the Supreme Council of Saudi Aramco, the rector of King Fahd
University of Petroleum and Minerals, three overseas
representatives and Saudi Aramco's new president and CEO, Amin
Nasser.

Saudi Aramco is responsible for all exploration, drilling and
production activities in the Kingdom. International oil companies
operate through joint ventures with Saudi Aramco in Saudi oil
fields and refineries. Examples of Saudi Aramco's recent major
projects include:

Petro Rabigh - the
largest integrated refining and petrochemical complex in the world.
It is a joint venture between Saudi Aramco and Japan's Sumitomo
Chemical.1

Saudi Aramco Total Refining
and Petrochemical Co. - a joint venture between Saudi
Aramco and France's Total Oil Co. for 400,000 bpd refinery with
integrated petrochemical production at Jubail.

Sadara Chemical
Company ("Sadara") - a US$20
billion joint venture between Saudi Aramco and The Dow Chemical
Company, which is the world's largest chemical complex ever
built in a single phase, with 26 integrated world-scale
manufacturing plants that produce more than three million tons of
products every year.2

Footnotes

1 Shearman & Sterling LLP has advised Rabigh Arabian
Water and Electricity Company in connection with the IWSPP being
developed for the Petro Rabigh project.

2 Shearman & Sterling LLP advised The Dow Chemical
Company on all aspects of the Sadara project. Shearman &
Sterling LLP (or its lawyers) has also worked on a number of other
significant projects in the Kingdom's oil and gas sector,
including National Petrochemicals Company's 400,000 tpa
polypropylene and propylene manufacturing complex in Madinat Yanbu
Al-Sinayah, SABIC's US$5 billion Yansab Petrochemicals Project,
Basell and Sahara Petrochemical Company's propane
dehydrogenation and polypropylene plant at Jubail and the Shoaiba
Fuel Oil Terminal Project.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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